By Teresa Rivas

Yesterday the Street was quite confident about strong demand for the new iPhone 5 models, and the trend continues today.

First up, Wells Fargo analysts Maynard Um and Munjal Shah, who have an Outperform rating and a $525 to $575 valuation on Apple (AAPL), break down the bull case for the stock based on historical accounting trends for iPhone ‘s’ model launches, which they write tend to carry better gross margins.

Historically, the quarter of an iPhone launch has seen accounting gross margin headwinds (which, in our opinion, makes Apple’s September quarter gross margins more impressive). If our accounting reversal assumptions are correct and assuming 5s/c mix goes to two-thirds of iPhone volumes, we believe December corporate gross margins could be 39.6% (versus our 38.3% estimate)–or $0.56 in incremental EPS–without calculating any potential incremental benefits from deferred margin on component sale or warranty accruals. The March quarter could see even greater upside potential as warranty accruals have typically seen material decreases per unit in the third quarter following an “s” version launch, which could lead to the March quarter corporate gross margin hitting 40% (versus our 38.5% estimate)–a level not seen since September 2012. While the reversals of these can vary, if we just take a holistic step back, we note that gross margins have gone up by an average of 225bps in the two quarters of launch in an “s” cycle versus the two quarters of launch in a new form factor iPhone where gross margins have decreased by an average of 225bps. Gross margin improvements, particularly if they get to 40%+ would, in our opinion, dispel high-end smartphone commoditization fears. We also believe Apple can still expand distribution (280 operators today vs. BlackBerry at 650 at its peak) to drive volume growth but maintain our view that the gross margin expansion story is more compelling.

Um and Shah also cite earlier year-over-year comps and positive supply chain data, along with improving gross margins, as catalysts for earnings growth.

Elsewhere, Pacific Crest’s Andy Hargreaves who has a Sector Perform rating on the stock, notes that iPhone demand is much more skewed to the pricier 5s model than the 5c: While this is good news for the company’s profits and proof its pricing power going forward, he writes that it could cause some near-term headwinds, given quickly growing inventories of the 5c.

Checks at carrier stores suggest the iPhone 5s is outselling the iPhone 5c in the United States and Western Europe by a ratio of over 2:1. Since the iPhone 5s is significantly supply constrained, true consumer demand is likely more heavily skewed toward the iPhone 5s than sales numbers would indicate.

We believe the demand imbalance creates two notable near-term risks: (1) December iPhone sales could miss our estimate of 51 million due to lower-than-expected 5c sales and an inability to ramp 5s volume above our expectation and (2) carriers could miss quarterly sales numbers, which could give the impression that aggregate demand is weaker than it likely is. To be clear on the second point, we do not believe high-end smartphone demand is particularly strong, but that the 5s shortages could make it appear weaker than it is, as many iPhone 5s buyers will likely wait for supply to improve rather than buy an alternative phone.

Our checks suggest that iPhone 5c inventory at carrier stores is already near levels we would consider normal for the middle of a handset’s lifecycle. Unless demand for the 5c meaningfully increases, inventory could reach target levels within the next month or two, which would likely prompt a slowdown in production relative to our current expectations.

If the mix of iPhone demand does not change materially in the coming months, we believe the combination of limited production capacity for the iPhone 5s and weaker-than-expected demand for the 5c could drive total iPhone unit volume below our FQ1 estimate of 51 million.

Nonetheless, Hargreaves writes that once the company gets beyond these near-term issues, the demand for the 5s paints a much brighter picture—one of a company that enjoys “tremendous customer loyalty, continues to create meaningful innovation and has incredible pricing power,” which should help keep the iPhone profitable over a longer span than many investors think is possible. Despite his neutral rating, he sees the stock as a bit undervalued at this point, given the risk/reward profile and these longer-term benefits.

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